Basic Employee Compensation Facts for Every Business Owner

Paying employees correctly should be a top priority for business owners; failure to comply with local, state and federal regulations regarding employee pay may result in costly penalties.

Here are some key elements of employee compensation for businesses to be aware of:

Employee Classification

According to the Fair Labor Standards Act (FLSA), covered businesses must classify their positions as either exempt or non-exempt. Certain FLSA rules and regulations, including minimum wage and overtime requirements, apply to non-exempt employees, but don't apply to exempt employees.

Exempt employee positions are most often associated with white collar professions, including executive and administrative positions, outside sales and some computer professional positions. Employees who fit into this category based on the provisions of the Fair Labor Standards Act generally must be paid on a salary or fee basis (depending on the type of position) at a certain salary level , and they must be responsible for job duties considered exempt under the applicable regulations.

For non-exempt employees, employers are required to pay at least the applicable minimum wage for every hour worked and provide the appropriate overtime pay for each hour worked beyond 40 per week at a rate of one and one-half times the employee’s regular rate of pay. State laws may be more stringent.

It's a good idea to clearly identify whether a position is classified as exempt or non-exempt under the FLSA and any applicable state laws in the job posting in order to avoid confusion and wasted time while recruiting job applicants.

Minimum Wage

Under the FLSA, non-exempt employees must be paid a minimum wage of $7.25 an hour for the first 40 hours of their workweek. However, where an individual state or local jurisdiction mandates a higher minimum wage, employers must pay that higher rate to any staff covered under that law. In 2016, increases to state minimum wage rates included but were not limited to the following: New York is $9.00 an hour ($9.75 for workers in fast food restaurants); West Virginia, is $8.75 per hour; and in California, the 2016 minimum wage rate is $10 per hour. Every employer should know if changes have been made to the minimum wage rates in the state(s) and local jurisdictions where their employees are working.

Overtime

The FLSA requires employers to pay non-exempt employees an overtime rate of at least one and one-half times the employee's regular rate of pay for every hour worked over 40 in a workweek. Again, state laws may differ, allowing additional overtime pay in certain cases, so be sure to look up the specific requirements that apply to your employees.

Employee or Independent Contractor

In addition to exempt vs. non-exempt, it is important for employers to correctly classify each worker as an "employee" or "independent contractor." In general, employers withhold income taxes from employees, as well as withholding and paying Social Security and Medicare taxes, and an unemployment tax on wages. An independent contractor typically does not have taxes withheld on their wages. Fines, penalties and payment of back taxes are some of the potential consequences of misclassifying individuals in these categories. For more about how employee and independent contractor can be defined, visit the IRS and DOL (Department of Labor) websites.

Pay Frequency

Generally speaking, employers can establish a regular pay day for their workers, as long as they adhere to state statutes. While the most popular pay frequencies are weekly and monthly, some employers may choose (or be required to) pay employees using a mixed pay frequency (some paid weekly, others paid monthly, and so on.)

Wage Garnishments

A wage garnishment requires that an employer deduct funds from an employee's paycheck for the payment of an outstanding debt. Most wage garnishments come about as the result of a court order, which includes a letter sent to employers requiring them to immediately begin withholding a portion of the employee's earnings and remitting payment to the appropriate party. Wage garnishments are time-sensitive, so a business owner could potentially face severe penalties for not processing that garnishment (such as the full garnishment amount and other expenses like the cost of litigation) within an allotted time period.

Paying employees properly is a responsibility shared by all business owners. Make sure your business meets your employees' payroll needs while complying with all applicable federal, state, and local regulations.

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.